Options and Its types

No comments
An option is a contract which gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date. The seller has the corresponding obligation to fulfill the transaction – that is to sell or buy – if the buyer (owner) "exercises" the option. The buyer pays a premium to the seller for this right. An option which conveys to the owner the right to buysomething at a specific price is referred to as a call; an option which conveys the right of the owner to sell something at a specific price is referred to as a put. Both are commonly traded, but for clarity, the call option is more frequently discussed.


Options valuation is a topic of ongoing research in academic and practical finance. In basic terms, the value of an option is commonly decomposed into two parts:
  • The first part is the intrinsic value, which is defined as the difference between the market value of the underlying and the strike price of the given option.
  • The second part is the time value, which depends on a set of other factors which, through a multi-variable, non-linear interrelationship, reflect thediscounted expected value of that difference at expiration.
Options can be classified in a few ways.

According to the option rights[edit]

  • Call option
  • Put option

According to the underlying assets[edit]

  • Equity option
  • Bond option
  • Future option
  • Index option
  • Commodity option

According to the trading markets[edit]

  • Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:
  1. interest rate options
  2. currency cross rate options, and
  3. options on swaps or swaptions.

Other option types[edit]

Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options.

Visit Our Website: www.kansalfinancialservices.com
Follow us on Facebook: www.facebook.com/kfsdelhi
Join us at Google+: http://goo.gl/ylr5PX

No comments :

Post a Comment